Your first credit card may not have been perfect. After all, cards designed for credit-builders often come with low limits, no rewards and annual fees. So how long do you need to keep the thing around? Are you stuck with it forever?
No, it won’t immediately mess up your average age of accounts (AAoA)
It’s true that the length of your credit history makes up 15 percent of your FICO score. It’s also true that FICO’s algorithm rewards you for long-standing accounts. What’s not true is that, once you close an account, it stops being factored into your length of credit history.
According to FICO’s Arkali, a closed account is factored into your credit history “for as long as this account is captured in the credit file.” That’s 10 years for the three major credit bureaus (Equifax, Experian and TransUnion).
More good news – “As long as the closed account is reported to the credit bureaus and captured in the credit file, it will continue to age,” Arkali wrote in an email to CreditCardForum.
That means, if you closed a two-year-old account today, in five years it will be considered a seven-year-old account for purposes of FICO scoring.
Yes, you’ll lose the benefit of that old account 10 years later (when it falls off your reports).
“But by then, all your other accounts will be 10 years older,” Ulzheimer says. “So it’s not worth spending time worrying about that part of the issue.”
Yes, it might affect your credit utilization
Thirty percent of your FICO score is determined by “amounts owed,” and part of that is your credit utilization – how much you owe compared to how much credit you have. Eating up as little as possible of your total limit is rewarded by FICO’s algorithm.
When you cancel a card, its limit no longer factors in to that equation, which could cause your utilization to jump. The damage done, however, depends on how big your balance is and the limit on the cancelled card.
If the card you want to cancel has a paltry $200 limit, “that’s probably a no-harm-no-foul type of situation,” Ulzheimer says. However, closing a card with a $5,000 limit could upset your utilization balance.
Even if you pay in full every month, you’re not necessarily dodging the utilization bullet, Ulzheimer says. For credit-reporting purposes, you probably do have a balance, as the card issuer likely reports your balance to the credit bureaus when your statement is cut.
“So even though you pay it in full every month, the fact you used the card in the interim means you’re going to have a balance show up on your credit reports,” Ulzheimer says.
All this stuff about utilization doesn’t mean you should never cancel a card. However, if your available credit is lowered significantly because you closed an account, you have to be a lot more careful about making big purchases – or make sure you always bring your balances back to zero before your statement cuts.
Number of active accounts may make a difference
“Payment history” is a big one for FICO. It makes up 35 percent of your score and represents your ability to make credit payments on time. So does having, say, five open active accounts you’re making payments on look more impressive to FICO than four? Should you keep that fifth account open to boost your score?
Showing you can juggle numerous accounts can indeed help your FICO score.
“Number of accounts with no late payments can be factored into the FICO Score calculation,” Arkali explained by email. “Our research has shown that all else held equal, consumers with a large number of accounts consistently paid on time represent a lower risk of default relative to consumers with a small number of accounts consistently paid on time.”
That said, a closing single account (going from five cards to four, for example) probably won’t make a significant difference.
“All else held equal, small variations in the precise number of accounts consistently paid on time between two consumers is unlikely to cause a significant change in the FICO Score,” Arkali wrote.
So can I cancel this card or not?
To borrow a popular phrase from our forums, your mileage may vary.
“There are a different answers to the question,” Ulzheimer says. “It’s not as clean as, ‘Yeah go for it’ or ‘No, never do it.’”
If the card has an annual fee, consider how much that fee is compared to the credit limit. If, say, you have a credit-building card with an affordable annual fee and a $1,000 limit, it might be worth keeping if $1,000 is a big deal to your credit utilization ratio, Ulzheimer says. If the limit is small change compared to your other cards’ limits and the fee is too high for you to justify, don’t feel bad about closing the card.
Another reason to cancel: You qualify for much better cards now that you have better credit. Say you’re thinking of cancelling a $1,000-limit card with an annual fee that’s no longer worth it to you — and you get approved for a no-annual-fee card with a $15,000 limit. Don’t fret about cancelling the lower-limit card, because you’ve more than replaced it.
“It’s really simple math,” Ulzheimer says. “You’re swapping out $1,000 for $15,000 and that’s a net benefit of $14,000 to your utilization. That’s a great trade-in.”